The Morning Hark - 25 May 2022
Today’s focus …….Hawkish RBNZ, Fed minutes and Johnson’s Gray day
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August futures both up smalls on the day at 111.30 and 107.80 respectively. Yesterday EU commission head Von Der Leyen downplayed any expectations of an EU agreement on the banning of Russian oil in next week’s EU summit meeting. Although later the newly appointed French foreign minister said she was optimistic that a breakthrough could be found. Pick the bones out of that one. Once again choppy trading in the range we’ve spoken about with the thought that higher supply going forward and an uptick in demand from the US driving season starting at the weekend won the market’s focus overnight.
EQ - Asian stock futures all flat on the day with the Kopsi at 346, the Nikkei 26,700 and the Hang Seng to 19,940. The US indices both continue their rise from the lows which we saw after yesterday’s poor US data prints with the Nasdaq trading at 11,830 and S&P at 3,950. Rollercoaster day for the US indices with the Snap earnings warning hangover still playing out in early trading which was then followed by weaker than expected flash PMIs and then very poor housing data which took the Nasdaq down to near its recent lows before reversing lead by position adjustment into the close and scraping a positive return for the day.
Gold - Gold flat on the day at 1855 as it continues to hold onto its recent gains. Again out with a break back below 1800 we see further upside in gold especially if the USD remains under pressure. Our near term target is 1880 with 1900 beyond that.
FI - Yields lower across the board overnight with the US10y at 2.75. 2.70 looks the level to hold to maintain the upside.
FX - The USD continues to soften with the USD Index hovering around the 102 level. The key level we believe is now towards the 101 level which is the 50dma and the upward sloping support line. A break of this would indicate a move back to 99.5 and then 97.5. The USD is the casualty of the inflation/recession shift in the market’s mindset and yesterday’s numbers obviously did not help arrest its decline. All eyes today on US durable goods and the FOMC minutes to see if the sentiment shifts to a more supportive bias. Remember too that any month-end rebalancing in the equity space could also offer the USD some near term support. The EUR has been one of the main beneficiaries of the USD weakness boosted further by the hawkish tilt from the ECB and in particular from Lagarde (note she speaks again today). For now, we are trading around the 1.07 level with the 1.0770 and 1.0850 the upside targets. The 50bp July hike debate is very much in play with Holzmann and Kazaks both advocating or not ruling out such a move. Today sees a lot of speakers from the ECB Council where we shall look for further clues. NZD had a decent rally after the RBNZ delivered on its 50bp hike promise and a hawkish statement as it scraped back above 0.65 for the first time since early May.
Others - Bitcoin and Ethereum as previously discussed nothing to see here and well within its post Luna crash landing levels at 29,750 and 1980 respectively. Worth bearing in mind if we do see the proposed month end rebalancing buying of the magnitude that is being talked about Bitcoin could be worth a look with CME short exposure at extreme levels, liquidity as poor as it can be and especially if we manage to take out the 31,500/32,000 topside.
Ugly data across the board yesterday with all flash PMIs in EU, UK and the US missing expectations on the downside for both services and manufacturing measures. All remain above the 50 “recession” level although the UK is starting to get a little too close for comfort on the services component. In addition, the New Home Sales which we highlighted yesterday as one of the key forward indicators for a potential recession came in 16.6% lower MoM at 591k versus 750k expectations. Not the rosiest of outlooks as the Fed try to engineer a soft landing. The Fed minutes will be of much interest today and perhaps with the recent shift in focus by the market to the recession outlook away from the inflation path it’ll be interesting to see if we get any indication from the committee members on how they propose to signal dovishness in the face of weakening data whilst still remaining on the path of getting inflation down. Remember too the June start for the balance sheet reduction program is just round the corner.
RBNZ overnight delivered their 50bp hike and with it a hawkish statement with warnings of further hikes to come. Already the curve is pricing in close to 50bps for the July meeting and a further 100bp by the year end which would get rates to 3.5%. NZD understandably outperformed on the day.
May be worth keeping a close eye on the GBP on a day that could see the release of the long awaited partygate report from Sue Gray which could again heap more pressure on the ever more dishevelled PM Johnson. National rail strikes, threats of civil servant strike action, the cost of living debate, pictures of him raising a glass of wine at Downing Street parties during covid lockdown, two by-elections on the horizon forced on the Tories by scandals and a backbench rebellion which could see a vote of confidence in his leadership. As we’ve said before GBP doesn’t like political uncertainty and that’s what we’ve got just now in spadefuls. A break of 1.2450 in GBP on the downside would open up the recent lows again. Given the USD’s weaker tone it may be more prudent to play GBP weakness via the EUR dips to 0.8480/0.85 look inviting with the topside 0.86 level a first target.
📅⠀The main highlights for the day ahead in terms of data and speakers:
US Durable Goods April - consensus 0.6% vs 0.8% previously (13.30 BST)
FOMC Minutes - (19.00 BST). As a reminder, the policy announcement was very much in keeping with the market’s expectations with a 50bp hike and an aggressive forward guidance path. In his press conference Powell pushed back on future 75bp hikes stating that the committee was not actively considering such hikes. In addition, the meeting laid out the phased reduction in balance sheet which will start in June (some of the market had anticipated a May starting date). Key points to note will be the consensus around no need for higher magnitudes of hikes and how the Fed could signal dovishness going forward, in the face of market turmoil, whilst still staying on the course to neutral rates. In addition, any colour on how restrictive the committee feels rates have to go beyond neutral to tame inflation would be useful. Finally any colour on the details and thoughts on the upcoming balance sheet reduction program.
Brainard (17.15 BST)
Panetta (08.00 BST)
Holzmann (08.40 BST)
Lagarde (09.00 BST)
De Cos (09.35 BST)
Lane (10.45 BST)
Knot (10.45 BST)
Tenreyro (16.15 BST)
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
Real Vision - Here's the Good News About a Recession
Mish Talk - NAR Pending Home Sales Data Provides More Evidence of a Severe Housing Slump
Top Traders Unplugged - Joseph Wang - Global Macro Series - May 25th, 2022
Real Vision - The Whipsaws Will Continue Until the Fed Finishes Its Work
Politico - London Playbook: Biden vs. gun lobby — Gray day — Throw a windfall tax on the table
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - RRP (use) Hits $2T, SOFR Like T-bills Below RRP (rate), What Is (really) Going On?
VanEck - Global Recession Fears Persist
Blain's Morning Porridge - What Chance Governments and Central Banks will still save markets?
The Chart Report - Daily Chart Report 📈 Monday, May 23rd, 2022
Pepperstone - Are Central Banks about to make a major policy mistake?
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